ICU Medical Takes a Shot at Shorts; Sees Sales Rebound
By VITA REED
Someone forgot to invite ICU Medical Inc. to this year’s stock party. Looks like it might be invited next year, though.
Shares of the San Clemente-based medical device maker are down 10% in the past 52 weeks, versus the 28% gain posted by the Dow Jones Advanced Medical Supplies Index in the same period. Rival Becton Dickinson & Co. of Franklin Lakes, N.J., is up 34%.
Indeed, shares of ICU, which makes needle-free devices used in intravenous therapy, have bumped up and down for most of the year.
The low point: July, when shares sunk 24% to 23, just ahead of ICU’s second-quarter earnings results, which fell short of Wall Street’s expectations.
The good news: Since mid-October, shares have risen 36% to 34 at recent check, giving it a market value of $470 million.
“There has been a spike,” said Francis O’Brien, ICU’s chief financial officer.
O’Brien said the gain is a result of two factors. One, investors are confident that ICU won’t disappoint in the fourth quarter. Secondly, “the shorts started covering,” O’Brien said.
ICU officials lay much of the blame for share price gyrations on “shorts,” or short sellers, who bet that a stock price is going to decline. Short sellers sell borrowed shares with the hopes of buying them back at lower prices in the future. If shares targeted by short sellers start rising, nervous short sellers often “cover,” or snap up shares, to cut their potential losses. That, in turn, pushes share prices even higher.
O’Brien said in mid-November that the company has “one of the largest percentage short interests of any company on Nasdaq.”
The “short interest” in ICU’s stock was about 5.1 million shares last month, down from 5.7 million shares in October. The November short interest represented 39% of all shares held by the public.
ICU short sellers could be worried that the company relies on one major customer,Abbott Laboratories Inc. Abbott made up 64% of ICU’s sales in the third quarter.
Off Wall Street Consulting Group LLC of Cambridge, Mass., a newsletter geared toward short sellers, brought up ICU’s reliance on Abbott in a report earlier this year.
O’Brien has characterized that report “as relatively poor research.”
“It was not particularly useful, but it spooked a lot of people,” he said. “Then we missed the Street numbers in the second quarter, and that created even more uncertainties. That, I think, is why the stock had been weak from the spring through the summer.”
Another possible reason is the company’s second-quarter earnings, which came in at 26 cents per share, 32% lower than expected. Sales in the quarter were down 6% to $21.3 million compared to a year earlier, thanks to a decline in sales of its key Clave connector.
The device maker blamed seasonal fluctuations, in part from the timing of sales to Abbott but also due to the termination of a distribution deal with B. Braun Medical Inc. last year. The companies had been involved in a contract dispute.
ICU’s sales rebounded in the third quarter, up 25% to $25.5 million, versus a year earlier, though earnings of 28 cents per share were below the 33 cents expected on Wall Street. ICU is expected to post earnings of 47 cents a share in the fourth quarter, according to Thomson Financial.
One analyst agrees that short sellers have targeted the stock.
“The short argument is that there is a concentration of sales to one customer, which is Abbott, and Abbott is slowing down or that their share of the U.S. hospital base is eroding,” said Bruce Cranna, a diagnostics and medical supplies analyst for Boston-based Leerink Swann & Co.
Cranna said he “absolutely” believed that the Off Wall Street newsletter had caused weakness in ICU’s stock price.
“I do believe it was partially accurate,I do believe Abbott’s hospital business has slowed somewhat,” Cranna said.
But he also said the newsletter failed to cover other dynamics at play, including the fact that ICU has only tapped 50% of Abbott’s hospital customer base “and there’s room to grow within that base.”
Plus, the company is working on new products, such as a blood collection device ICU acquired in its buy of Vernon, Conn.-based Bio-Plexus Inc. last year. Some investors would like to see ICU diversify beyond its Clave device, which made up 69% of its sales in the third quarter.
As for how to deal with short sellers, ICU’s O’Brien said: “When you get all done, the only way you can deal with the shorts is to post good results, so we’re working on that.”
